Monday, April 15, 2013

Perception of Savings is More Important Than Real Savings

Human psychology is often counterintuitive. Perception of savings is often more important than real savings, as J.C. Penney found out to its chagrin.

In NY Times article (link at the end) J.C. Penny had for several months rolled out a campaign that promised "everyday low prices" and cut its sales events. Instead of often holding sales, it will keep the prices permanently low, promising savings every day, instead of only at sales events. It tried to adopt more of a Walmart-like pricing policy.

Shoppers, instead of enjoying the easier time to shop (i.e. Don't have to wait for sales), actually stopped coming. Sales dropped 25% from last year, and 5 days ago its CEO Ron Johnson was shown the door, and Penney is going back to the old model: lots of sales events, with normal prices on the high side.

What's the difference between a shirt that's priced at $5 vs. a shirt that's $10 with 50% off tag?

The answer has everything to do with psychology, not logic.

Most consumers have no sense of what an item *should* cost, and thus, have no idea what constitutes a bargain. Manufacturers often set "MSRP" (manufacturer's suggested retail price) which is artificially set high so retailers can discount off of that and look cheap. Nobody pays "retail".

So if you price a shirt at $5, you give the impression that the shirt is worth $5.

However, if you price a shirt at $10, and a 50% off tag, you give the impression that the shirt was worth $10, and you are willing to sell it for $5, thus giving the impression of a bargain.

J.C. Penney items are not daily essentials like the stuff Walmart sells. People usually need the stuff from Walmart every day, day in and day out (Walmart sells a lot more than that, I know), so everyday low prices is a good slogan (and even then, Walmart is having problems getting that pricing policy accepted in Asia). JC Penny stuff is more high-end and thus people expect to see discounts.

Does this have anything to do with MLM? Quite a bit. Sale of "woo" is heavily dependent on perception of value. After all, you're not going to pay for something you don't actually need, unless they can convince you that you really *do* need it.

Think about it. You don't really need a shirt. You can do without by wearing an old one, unless it's broke, got holes, got so ragged you can't wear it, or you just need something to create another outfit. You "need" a shirt.

What about those health supplements? Most of them aren't proven to do anything, nor do they promise to (except at the hands of deluded reps, who will sprout wild claims like cure cancer, cure diabetes, and so on.) Actually, they are not supposed to make ANY therapeutic claims BY LAW, at least in the US. Yet they have to convince you that buying and taking them will make your life better.

Keep in mind that most MLM products need to have a margin of 30-90% (or higher) to afford multi-level commission payouts. One of the most frequently encountered would be health supplements... enzymes, vitamins, minerals, special formulas, joint stuff, heart stuff, liver stuff, brain stuff, stem cell stuff... Really, I'm no kidding. If your body has it, there's probably some sort of supplement allegedly good for it.

You don't know what those products are actually worth. So you'll believe whatever the salespeople tell you.

Most of them don't actually do anything. It's all perception of value.

Did you like what you read? Did you feel like you learned something by reading it? Do you think your friends and family members could use the knowledge? If so, please spread the word. Share the article on your favorite social network by using one of the share buttons. Together, we can make people smarter and avoid scams.